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(VO) Welcome to ETF@30 – a series of candid conversations about the past, present and future of Exchange Traded Funds.
2023 marks the 30th anniversary of the first-ever US-listed ETF, launched by State Street, a leading manager of ETFs worldwide, and the largest ETF custodian, servicing nearly half of ETF assets globally.
We’ll hear from a diverse group of financial leaders about how ETFs have revolutionised investing.
In today’s show, Yie-Hsin Hung, Chief Executive Officer of State Street Global Advisors, talks to ETF pioneer Reggie Browne, Principal at GTS.
Soundbite: “Over the next 25 to 30 years, the assets and ETFs will outpace mutual funds”
GTS trades more than 30,000 different financial instruments globally. Reggie Browne himself is known by many as the “Godfather of ETFs”.
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Yie-Hsin Hung: Reggie, a big welcome. Thank you so much for joining us.
Reginald M Browne: Well, thanks for having me, I appreciate it.
Yie-Hsin Hung: The Godfather of ETFs – my goodness, what a title. Please shed some light on that if you will.
Reginald M Browne: Yeah, that's a pretty fun title, isn't it? When I was interviewed about 10 years ago, it was recognised that I was an early pioneer in launching ETFs for asset managers. Now I just run with it. I don't use it that much but when someone invokes it, I just smile. But it's really about the result of hard work and being first to be helpful with State Street and others, launching ETFs for them around the world.
Yie-Hsin Hung: Well from my perspective, it's really well deserved, Reggie. Now you've had, as you alluded to, a long and incredibly successful 30-year career, and it's cut across equities, derivatives, market making, engaging with clients. And on top of that, you said you had a very important significant role in the development of the ETF industry. Is that right?
Reginald M Browne: Yes. I've been at the apex of innovation, particularly over the last 20 years, as ETFs evolved from equity funds to fixed income to multi-asset class ETFs. And then, over the generations, we're just trying to find the best naming conventions. I mean, it was a long time: ETF wasn't ETF, it was UITs and other wacky names. And then, it really comes down to delivering the best ideas into the marketplace where many asset managers can launch ideas for the retail community to adopt and use in their portfolios.
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text: Influence of the 2019 SEC ETF rule
Yie-Hsin Hung: So maybe let's fast-forward, or if we go back a couple years from where we are today. In 2019, the SEC approved the ETF rule, which made it a lot easier for firms to launch new ETFs without having to get an exemptive order. How important do you think that development was to the industry's more recent growth trajectory?
Reginald M Browne: You know, pre that rule, it took a long time to gain exemptive reliefs to the 40 Act structure to launch ETFs, and it gave an uneven advantage, particularly to newer entrants. With that rule set, I think you'll see new active ETF managers come in launching ETFs, more importantly, but also you see the growth of retail community around the world, not just in the United States.
Yie-Hsin Hung: Yes, that makes so much sense. I think about the past 30 years, ETFs have really democratised investing to such a large degree, and it seems like that 2019 change furthered that even more.
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Text: Fixed income and ETFs
So, as we've talked about, the ETF industry has evolved, but it also has transformed the broader financial markets for investors, and you've talked about active ETFs and new ideas. Take fixed income, for instance. How would you say ETFs have changed the way investors access that part of the market?
Reginald M Browne: Well, I can tell you, with the launch of fixed income ETFs, one is to lower the cost of exposure to corporate bonds with the indexing of corporate bonds inside of an equity structure. So remember, ETFs are equity structures, and fixed income has a different market structure. It has allowed for the price discovery and the risk transfer in corporate bonds to be more efficient. And so if you look at the number of corporate bonds, it actually has exploded, where it is, probably with 35,000 different corporate bond listings in the United States. And for a subset of those to be indexed inside of an ETF, it has allowed for asset managers and retail investors to understand the best price of how that bond is currently trading. And ETFs have allowed for that to occur in a pretty efficient manner.
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Text: ETF growth vs. mutual funds
Yie-Hsin Hung: We've talked about ETF assets really having exploded from one ETF to 12,000. When do you think that they will potentially eclipse mutual fund assets? And if you do think that's the case, over what timeframe do you think that will happen?
Reginald M Browne: I think that this is one of the biggest debates in the ETF community, around the growth of ETFs. I think, particularly, there's a lot of innovation whiteboard yet to be filled. And if you look at this generation that's retiring, and inheritance by younger people, the wealth transfer, I believe that there's an opportunity to transfer that wealth from traditional vehicles into ETFs because the younger generation understands them. From the perspective of what's next, I think the active equity structure or active ETFs is pretty delicious when you look at the opportunities for growth. Look at the number of mutual funds. It far exceeds the number of ETFs. And I think, over the next 25 to 30 years, the assets and ETFs will outpace mutual funds, largely because of cost and then, two, because of regulatory pressures around how mutual funds are regulated, the pricing convention, and then the fact that they're not transparent – you just don't know what's inside of a mutual fund.
Yie-Hsin Hung: Right.
Reginald M Browne: So I think there's a lot of drivers there.
Yie-Hsin Hung: Yes, that makes sense on top of the tax efficiency of the ETF vehicle.
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Text: Investor’s insight: Choosing an ETF
Yie-Hsin Hung: Reggie, I have a question for you. So if I'm an investor and I'm trying to choose between one or two or three ETFs as sort of the same option in terms of the index they follow, what criteria should I use, or what criteria should investors think about?
Reginald M Browne: Well, that's an important question. I think that the ETFs that have the most liquidity from the secondary trading perspective, so how many shares trades per day, is a good metric, but also the construction of the index. So if you couple the index versus the secondary trading and also the number of ETFs that the ETF issuer has in the marketplace, you would think that, from a brand perspective, you're in safe territory to invest in a series of ETFs by the same manager. But also it's the liquidity that is an important metric, where it's easy to purchase and easy to sell because its spreads are tight and because of lots of natural liquidity that keeps a tight spread.
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Text: The next big thing for ETFs
Yie-Hsin Hung: So, one final question, Reggie. What do you think is the next big thing in ETFs?
Reginald M Browne: Well, I think it's a couple. One, I believe that as active managers launch ETFs or move into ETF structure, I think the growth of the number of listings is unlimited.
Two, with the wealth transfer of one generation to another, the transparency and the tax efficiencies that you mentioned earlier, it's pretty important for the emerging investor class. And then there's also a lot of opportunity around structures, around derivatives like options where it will increase the returns by having a long index, and selling calls on top of that where there's some sort of protection on the upside or protection on the downside but it gives an extra layer of income. Those ideas are complex and I think that there's a lot of opportunity for innovation around there.
Yie-Hsin Hung: Thank you so much for sharing your thoughts and expertise with us today, Reggie. It's really appreciated.
Reginald M Browne: Well, thanks for having me. It's been a pleasure spending time with you.
